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Young & Jamisons modified cash-basis financial statements indicate cash paid for operating expenses of $150,000, end-of-year prepaid expenses of $15,000, and accrued liabilities of $25,000. At the beginning of the year, Young & Jamison had prepaid expenses of $10,000, while accrued liabilities were $5,000. If cash paid for operating expenses is converted to accrual-basis operating expenses, what would be the amount of operating expenses?

	$125,000
	$135,000
	$165,000
	$175,000

This Answer is Correct (Answer: C, $165,000)

This answer is correct because it subtracts the yearly change in prepaid expenses from and adds the yearly change in accrued liabilities to the cash operating expenses to arrive at accrual-basis operating expenses. The cash paid for operating expenses is $150,000. Because prepaid expenses increased by $5,000 (end of year of $15,000 less beginning of year $10,000), this amount is not included in accrual-basis expenses. The accrued liabilities increased from $5,000 at beginning of the year to $25,000 at the end of the year, indicating that an additional $20,000 of liabilities were incurred and not yet paid. To convert to accrual-basis operating expenses, the cash paid of $150,000 is adjusted by subtracting the increase in the prepaid expense account, and adding the increase in accrued liabilities. ($150,000 5,000 + 20,000 = $165,000)

Can please explain why the answer is $165,000 in an very easy way regardless of explanation above because don't understand most of it? Also can explain in a very simple way why is the increase of $5,000 for prepaid expense subtracted from cash paid for operating expenses of $150,000 and why is the increase in accrued liabilities of $20,000 added to cash paid for operating expenses of $150,000 when converting from cash paid for operating expenses to accrual-basis operating expenses?

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